SEBI Chairman Stresses Merchant Banker Role In SME IPO Oversight

SEBI Chairman Tuhin Kanta Pandey has said that merchant bankers and stock exchanges must take greater responsibility for reviewing IPO disclosures, especially in the small and medium enterprise segment.

Pandey said the regulator had observed a rise in cases where tax disputes or revisions emerged as companies prepared to go public.

“We’ve been seeing a lot more cases lately where tax revisions or disputes emerge around the time companies are headed for IPOs,” Pandey told NDTV Profit in an interaction. “That naturally raises questions about the level of scrutiny applied at the time of filing.”

He said both merchant bankers and stock exchanges should apply higher levels of scrutiny to documents filed ahead of listings. “After all, these are critical disclosures being made to the public and to investors,” he added.

Pandey said merchant bankers, in particular, had a key role in ensuring proper due diligence. “The onus is on merchant bankers to ensure that proper due diligence is being conducted,” he said. He added that SEBI had already introduced changes to tighten the regulatory framework.

One change requires that companies must report an operating profit of at least Rs 1 crore in two of the past three financial years to be eligible for listing. “This helps filter out businesses that may not have a stable or credible financial base,” he said.

Pandey also said SEBI had introduced restrictions on the use of IPO proceeds. “There are clearer limits now—general corporate purposes can no longer be a catch-all category,” he said. He added that IPO funds could not be used to repay promoter loans. “These changes have been brought in to ensure that funds raised from the public are actually used for business growth and not just for financial restructuring,” he said.

In December 2024, SEBI approved new regulations for SME IPOs at its board meeting, following earlier warnings to investors.

The updated rules require issuers to have an operating profit of Rs 1 crore in at least two out of the last three financial years. The offer for sale by selling shareholders is now capped at 20% of the total issue size, and shareholders are not allowed to sell more than 50% of their holdings.

Under the new rules, 50% of the excess promoter shareholding will be unlocked one year after the IPO, and the remaining 50% will be released after two years. The allocation process for non-institutional investors in SME IPOs will now follow the same method as used in main-board IPOs.